Home Depot: The DIY Dividend King

Summary

The Home Depot is one of the largest home improvement stores in the US.

Their business runs like a well oiled machine.

Competition is everywhere for The Home Depot but they are changing the business fast enough to keep up.

The metrics are solid, although the price is just about at the 52 week high.

The Home Depot is a solid buy for a dividend growth portfolio as it boasts a safe dividend and a strong business.

Home Depot (NYSE:HD) is one of the largest home improvement stores in the United States and it is a brand that many have grown to know and love. The business revolves around the sales of building materials that can be used for a variety of different projects (either store to builder, person to person, etc), home improvement classes/projects, and a number of home and lawn services. The company owns and operates out of the United States, Canada, Mexico, and various US territories.

The business strategy revolves around three key initiatives as shared by their direct report. These three initiatives are customer experience, product authority, and productivity and efficiency driven by capital allocation. On the customer experience front, the company continues to place great importance on meeting the expectations of a variety of different shoppers that find their way to their stores. For the do-it-yourself customer such as myself, they place a high importance on having trained employees that can provide input on various projects and also those that can point you towards classes that they have in-house to teach you if you want a more hands on approach. They also make sure to put importance on customers who would rather buy their items direct and pay Home Depot or a third party contractor to complete for them by making these services readily available on site. Finally, they place emphasis on the experience for professional customers by providing services such as will-call, store front loading, loyalty programs, and delivery services. By placing a focus on a variety of customers, I feel that the company understands what should always come first for a consumer business which is customer satisfaction. If the customer is happy, I feel that it usually translates to good profitability for the company overall because the good relationship can breed new customers through word of mouth or positive reviews online. Home Depot does a great job at keeping the customer happy and this is evident by the growth in their private label credit accounts. In fiscal 2015, the company saw 3.2 million new private label credit accounts, growing that avenue of business to a total of 12 million total which accounted for 23% of sales in 2015 per the company's 10-K.

As for competition, the company faces a lot of it. Being one of the largest home improvement stores has its benefits however. As one of the largest, it would be assumed that the public would bring a company such as Home Depot up very easily when they think of places to find lumber, home improvement goods, or gardening supplies but that doesn't mean that it cannot be undercut by places such as Wal-Mart (NYSE:WMT) that consistently try to poach customers through price matching offers. In addition, there are other neighborhood stores that may be of a more specific nature that offer home improvement items that are not offered at Home Depot. This becomes more and more of a problem when customers can easily go online and price shop without ever having to leave the privacy of their own home. Home Depot also has a large competitor that runs off of a model not unlike its own. That competitor is of course Lowe's (NYSE:LOW). I feel that these are minor issues however as the brand that Home Depot has acquired through the years is a strong one even though Lowe's has done a heck of a job raising their share price. I know that when I have something that needs done around the house, my immediate thought is to jump in the car and head to one of their locations to pick up whatever I need to get the job done. That doesn't mean however that others don't prefer competitor Lowe's . Everyone has their preference and if the company becomes complacent, they could find themselves dethroned at the top of the home improvement store palace by their competitors.

To handle this issue, Home Depot has had to expand their model and go online for customers to meet them. In 2015, Home Depot opened the third of their three new DFC's (Direct Fulfillment Center) that enable them to ship direct to customers through online shipping anywhere in the US within two business days if required. I feel that this will further help them fight off competitors that may already have a strong online presence because consumers that like Home Depot but find something online that they like can simply have the item shipped to them straight from a DFC rather than go with a competitor that offers the same thing. A customer that would normally then go to the competitor for the ease of online access has no excuse to not go to Home Depot's online store instead as they already recognize and trust the brand. It is simply now online rather than only in store. Granted, the company only expects to be able to reach 90% of their customers within the two day shipping area but 90% is a very high percentage of households in the US and I don't expect this to be an issue except in more rural areas.

Another issue that I see Home Depot running into is the issue of not being to change quick enough to fit new desires of the public. With so many TV shows out there such as Flip or Flop, Property Brothers, and others that are pushed by ads on Hulu, commercials on DirecTV, or otherwise, the market is constantly shifting with new ideas. I think this can be a good and bad thing for businesses such as Home Depot. It is a good thing because it brings customers in who would otherwise have no interest in home renovation products into the store to buy what they are selling. It is a bad thing however when the products are too new that are desired and cannot be stocked quickly enough into their inventory. This is made even more difficult when you think of the amount of space that is required to place new inventory into an already very full store. I think that this could produce issues in the future where smaller more specialized online retailers can stock these items more swiftly.

We are however creatures of habit and I think the management of the company understands that. They do a great job at making customer satisfaction a number one goal. The company just retrained a number of employees to make sure that they have the tools necessary to provide great service and they appear to be committed to doing so whenever possible. In addition, it is evident that this is giving great satisfaction to customers as sentiment online is generally very positive (in the 80+% range per TDAmeritrade's available information).

Let us then move to the company as it stands now on pricing and general analytics. Currently, the company trades at a share price of $133.84. This is close to their moving 52 week average high of $136.23 and it should be noted as the stock price appears to be a little inflated. This would amount to only a 1.75% discount off the high. The company also holds an EPS of 5.46 which is excellent in terms of shareholder worth and a high P/E ratio of 24.60x. This however does not worry me as it is only slightly higher than the industry average of 23.09x. If paired together with an annual dividend payout of $2.76 (2.08%), this stock really starts to shine and it appears to bring a great deal of value to any portfolio as it sits at a beta of only 0.9 so it should not see much change regardless of the weather of the market.

If we look then to the historical information, Home Depot has had an annual growth over the past five years in EPS, revenue, and dividends. Their EPS saw a growth of an incredible 22.10% (which is only made better by their 20.09% dividend growth). This would appear to suggest that it would fit very nicely into any dividend growth investor's portfolio. Also, the stock saw a 5.42% growth in revenue. These are very healthy numbers for a company with a market cap of 167.5B and I think it is evident why so many investors have been flocking to the stock.

Finally, I would like to look at what the analysts have been saying. Analyst Reports generally point towards buying in but most recent was on Feb. 29th, 2016 by ResearchTeam which suggested to hold rather than buy. Over the past 22 months, ResearchTeam has changed its rating on Home Depot five times. Of those five times, four were correct in predicting the direction and one was incorrect. This correlates with an 80% correct prediction of HD over the last 22 months. These ratings are provided by TheStreet.com, MarketEdge, Jaywalk, Ford Equity Research, and S&P Capital IQ by utilizing historical analysis and then providing their ratings.

Over all, I like Home Depot. The company has a strong history, a great customer base with a positive outlook on the company, and they have been consistently profitable over time. If this is paired with their healthy dividend that only has a payout ratio of around 50%, the stock appears to be one of the safer bets that you're going to find in the market currently as they have more than enough room to grow their dividend even further. Even though they may have some difficulties with the online market, the company appears to be combating them well enough through the use of their DFC's and as long as they are not hit with another credit card breach, the company should see further profitability in the future. Only time will tell but I believe Home Depot will continue to be a safe place (although an expensive one) for investors to place their bets in the near future and for a long time after that.

Disclosure:I am/we are long WMT, T.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.